Quantifying the Business Value of Information Technology

April 10, 2002
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REDMOND, Wash., April 10, 2002 — Kenny Roberts is convinced that deploying applications to cost-effectively share information can make or break a project’s budget, and ultimately build or lose business relationships.

It is based on this belief that his company, Naptheon, a wholly owned subsidiary of Newport News Shipbuilding (now Northrup Grumman Newport News), used the Microsoft .NET Platform, including the .NET Framework and Microsoft Visual Studio .NET, to improve its speed to market in constructing and launching their new application, ShipRepair for .NET. The Virginia-based Naptheon helps shipbuilding and repair companies use IT for their business solutions.

As Naptheon’s manager of e-business, Roberts says time was of the essence. The USS Nimitz, a United States Navy aircraft carrier, had to be up and running just a few months after Naptheon invested in the Microsoft products. A handful of employees had hundreds of forms to rewrite in order to make that happen. “We never would have been able to hit our dates without using the .NET platform, or without Microsoft’s help,” he says.

Real data backs that assertion. After deploying the .NET platform, Naptheon assessed its company benefits using the Microsoft REJ (Rapid Economic Justification) Framework. REJ is designed to help IT professionals analyze and optimize the economic performance of IT investments and appropriate resources and capital for IT projects. Roberts says Naptheon was able to save time and money — and prove it with an independent audit — using the Microsoft process.

REJ and the Microsoft Business Value team are integral components of Microsoft’s strategy to help organizations justify and defend the money they spend on the company’s products and services.

Number Crunchers Ask ‘Why’ on IT Investments

Microsoft created its Business Value team several years ago to help organizations such as Naptheon explain the value of high-tech expenditures to chief executive officers and chief financial officers, says Shafeen Charania, director of the team at Microsoft. It has been an evolutionary process, he says — one that has especially picked up steam in a shaky economy and become an even bigger priority for Microsoft.

“The industry hasn’t provided much compelling information about why someone should invest in IT, other than saying it will lower the total cost of ownership,” Charania says. “We felt we were underselling IT — Microsoft, as well as the industry at large. In promoting only the cost-avoidance aspect, all we were doing was talking about one facet of the entire potential of technology.”

That was before customers began demanding a more extensive business analysis, and Microsoft began requiring more economic justification for its products, he says. Charania’s team works closely with other Microsoft departments, particularly those that build the products sold to companies. Through them, the business value message is communicated in a language that all business managers — be they from marketing, administration, sales or IT — can understand.

“The CEOs of organizations are focused on meeting and exceeding their business objectives as stated in things like their annual reports,” Charania says. “The role of IT is often relegated to being a service (like real estate, or even electricity) — everything is OK as long as the business is running. In fact, IT and business don’t necessarily even speak the same language when discussing their respective work. We’re trying to align the IT investment with business objectives and establish a vocabulary through which business can better understand the role of IT, what it can do for them, and how they can optimize this investment.”

REJ Framework Quantifies Value

Charania says Microsoft is taking a 360-degree approach to business value. The REJ Framework begins by working with key stakeholders in the organization to understand their critical success factors (CSFs), the strategy by which they will achieve them, and key performance indicators (KPIs) that will measure success. The next step is to map technology solutions to the CSFs.

Benefits may be expressed in many ways, Charania says, but the key is to express them in terms that match the needs of the business, and then evaluate the total cost to achieve those benefits. In the third step, REJ utilizes internal tools and industry-standard tools (such as those of the Gartner Group, META Group, the U.S. Securities and Exchange Commission, and from academia) to quantify the costs and benefits of the solution, and — importantly –establish stakeholder commitment and backing for each benefit and cost.

Charania notes that many IT projects successfully build an economic justification identifying benefits and costs, then fail to live up to the expectations of senior management or stakeholders. Accurately profiling the risks of an IT investment can help avoid pitfalls, first by identifying various forms of risk, then by developing risk mitigation plans and then by adjusting the estimates of benefits and costs accordingly.

Finally, the Business Value team documents the impact of the proposed IT investment using a multi-year, risk-adjusted, discounted cash flow analysis. It includes metrics such as Internal Rate of Return (IRR), Net Present Value (NPV) and payback period, or whatever else the organization uses to assess business investments.

In the case of Naptheon, the REJ predicted an internal rate of return in excess of 100 percent, which was driven in part by a projected 19-percent reduction in the time required to create and launch ShipRepair for.NET. The REJ also quantified the revenue increase over the next five years as a result of using the .NET framework and Visual Studio .NET. It also projected that Naptheon would be able to significantly reduce development time to launch new applications. Finally, the REJ calculated that lower IT costs would be achieved through the effective reuse of software code.

The REJ analysis was independently audited and confirmed by Immedient Corp.

“This has been a wonderful experience. We are very pleased customers,” Roberts says.

REJ Makes Case for New Infrastructure

Syed Mir is vice president of energy production for Ontario Power Generation (OPG), a North American wholesale electricity provider. Mir says he knows all too well that IT investments can sometimes be a hard sell to non-technical colleagues.

Following deregulation, OPG needed to reorient itself to an open-market enterprise with a focus on customer service. Mir wanted to upgrade his existing infrastructure to Microsoft Windows 2000 Advanced Server and Exchange 2000 Server Enterprise Edition for the company’s 12,000 users. And he wanted to do this at a time when managers were looking to downsize and become more efficient.

“We couldn’t come up with a solid business case, with tangible benefits, to get senior management to go yet again for another operating system, or suite of office-productivity products, so we turned to the REJ,” Mir says. “Rather than telling us how great this version is, Microsoft proved it to us. Some real hard numbers came out of the REJ study, and it put us probably six months or so ahead of schedule. It took us a third of the time to get senior management to buy in.”

The REJ demonstrated that a uniform network based on Windows 2000 Advanced Server could help OPG reduce overall IT costs by 10 percent. Creating a standard desktop using Microsoft Office XP running on Windows XP Professional, OPG could realize a 5-percent reduction in desktop-related support calls, and enhance productivity and improve manageability.

According to the REJ, standardizing on Microsoft Exchange 2000 Server Enterprise Edition would provide a uniform messaging and collaboration platform that could help enhance productivity by improving teamwork. OPG expects a 20 percent Internal Rate of Return, and increased competitive ability as a result of this investment. The REJ findings were independently audited and confirmed by the Giga Information Group.

With OPG now in the designing and planning stages of execution, Mir says the REJ spared the company from conducting five or six tests using certain sets of employees or departments to determine whether new technologies should be deployed. Previously, Mir says, that was how OPG had determined the need for and justified its IT investments in the past.

“In that case, everyone has different views; it takes so much more time,” Mir says. “Using the REJ, we were able to work quickly and much more efficiently. It gives us more time to concentrate on the core business of building and maintaining customer and partner relationships and providing energy services.”

For Naptheon and OPG, REJ proved that the economic value of IT investments could be rapidly quantified in the language of the particular business at hand, thereby freeing the enterprise to focus on “the business of business.”